The Morning Ledger: Chinese Companies Rush in Where Bankers Fear to Lend

A Chinese 100-yuan note is seen against the backdrop of the Chinese flag.

Bloomberg

Good morning. Chinese companies are increasingly stepping in as lenders, as banks reduce their funding to struggling industries and the country’s mammoth bond market comes under strain, Rachel Rosenthal and Anjie Zheng report.

Company-to-company loans in China jumped by 20% last year to 13.2 trillion yuan ($1.92 trillion), according to research firm CEIC. That is roughly double the size of the loan book at Wells Fargo & Co., the U.S.’s biggest lender. This entrusted lending, so named because banks serve as middlemen, is now the fastest-growing major component of the country’s elaborate system of informal, or shadow, banking.

The most recent surge came during the selloff in China’s $9.3 trillion bond market late last year. Big, cash-rich companies—mostly state-owned enterprises and some private companies—stepped in. But the practice poses broader risks for China’s economy.

Instead of investing in their core business, companies can earn interest rates of up to 20% making entrusted loans, often with only cursory checks on borrowers’ creditworthiness. Such lending often props up companies in sectors like mining and property where Beijing wants to reduce excess capacity.

President Donald Trump will meet Japan’s Prime Minister Shinzo Abe today. The meeting could rile one of the most closely watched relationships in finance, the yen and the dollar.

Mr. Trump has recently criticized Japan for its trade surplus with the U.S. Last year, Japan sold $68.9 billion more goods to Americans than it bought from them, Quartz reports.

CORPORATE NEWS

Enfamil infant formula, made by Mead Johnson, sits on display in a supermarket in New York City, New York, U.S., Feb. 6, 2009.

Bloomberg News

Reckitt Benckiser to acquire Mead Johnson. Reckitt Benckiser Group PLC on Friday said it agreed to buy baby-food maker Mead Johnson Nutrition Co. for $16.6 billion, a deal that will almost double the size of the British company’s consumer-health business and help it push deeper into emerging markets.

In other news, a former employee of Mead Johnson has sued the company stating she was unfairly dismissed after raising safety issues over bottles of infant formula, the Financial Times reports.

Tech industry applauds court ruling on immigration order. The appeals court decision Thursday to uphold a nationwide halt to President Trump ’s executive order on immigration delivers a victory to hundreds of companies that have publicly opposed the order and could empower them to keep fighting the Trump administration.

Apple bets on Britain.Apple Inc. is “very optimistic” about Britain’s future post-Brexit, Chief Executive Tim Cook has told Prime Minister Theresa May. Mr. Cook said the country would be “just fine” outside the European Union, the BBC reports.

Zenefits cuts nearly half its staff. The health-benefits broker that continues to grapple with weak sales and regulatory hurdles cut another 45% of its staff. The company is down 70% to 500 employees from the 1,640 employees it had in September 2015.

REGULATION

A photo dated May 13, 2014 shows the former chairman of the supervisory board of Volkswagen, Ferdinand Piech.

In other news, Sergio Marchionne, the CEO of competitor Fiat Chrysler Automobiles NV, criticized EU emission regulations, stating the single market was meant to “avoid this mess,” Reuters reports.An EU official said Thursday the EU plans legal action against governments that have failed to police emissions test cheating by carmakers.

Banks sue U.S. government. A major trade group for the banking industry sued the U.S. government Thursday over cuts to the money banks receive from the Federal Reserve enacted as part of a highway and mass-transit funding measure in 2015.

Trump targets air-traffic control system. President Trump has suggested changes to a national air-traffic control system he described as “totally out of whack,” taking on an issue that has foiled numerous previous efforts at modernization.

In other news, the EU Commission is set to rework a law that enables it to impose duties on non-EU airlines in case they cause injury in European airlines, Reuters reports.

BoE fines Japanese bank. The Bank of England handed out its largest-ever fine after Japan’s Bank of Tokyo Mitsubishi Group Inc. failed to inform it of action by U.S. authorities over the watering down of a report into historic sanctions breaches, the Financial Times reports.

Rolls-Royce probe continues. Former Rolls-Royce Holdings PLC Chief Executive John Rose has been questioned as part of the investigation into alleged corruption at the aero-engine maker, the Financial Times reports.

Developing markets drag down Coke.Coca-Cola Co.’s beverage volumes declined 4% in Latin America, contributing to a decline of 1% globally in the quarter. Overseas weakness and a strong dollar weighed down on the company.

Twitter Inc. reports slow revenue growth. The social-media company isn’t benefiting from being at the center of American politics, with President Trump frequently resorting to Twitter. Revenue grew 0.9% year over year.

Viacom Inc. profit declines. The company’s profit dropped to $396 million from $449 million. It also announced that it would narrow its focus to six out of two-dozen channel brands.

Dunkin’ swings to profit.Dunkin’ Brands Group Inc. posted a profit of $56.1 million, compared with a loss of $8.9 million a year ago. It also sold its remaining company-operated stores and is now completely franchised.

CVS Health Corp.’s revenue up.Revenue jumped 12% to $45.97 billion. An 18% increase in sales in the pharmacy-services segment was driven by a rise in pharmacy-network claims.

High inventory levels hurt Coty Inc.’s earnings. The beauty-product maker posted profit of $46.8 million, or 6 cents a share, down from $89 million, or 25 cents, a year ago. This was attributed to intense competition and higher-than-anticipated inventory levels.

Cemex SAB reports higher profits.The Mexico-based cement maker posed net profit of $214 million for the quarter, compared with $144 million a year ago. It also posted its biggest full-year profit in almost a decade.

Gannett Co. boosted by acquisitions.The company acquired Journal Media Group Inc., North Jersey Media Group and ReachLocal. This contributed to a 17% jump in revenue in the fourth quarter.

Higher profits for Thomson Reuters Corp. The company posted a profit of $2.23 billion, compared with $408 million a year ago. It is undergoing a corporate restructuring during which it will cut around 2,000 workers.

Kellogg Co. revenue declines. Revenue fell 1.4% to $3.1 billion. The cereal and snack maker also said that sales in its U.S. morning-foods business—cereal, Pop-Tarts and other foods—declined as well.

Uber Technologies Inc. joins hands with Zipcar. In its deal with Zipcar, drivers in Boston can rent vehicles for an hourly fee coupled with a monthly rental fee. Uber drivers can make up to $20 an hour, excluding certain expenses, when there is strong demand.

Levi Strauss & Co. income slips. The company reported a 5% decline in income last quarter, largely because of its expansion strategy and e-commerce ventures. Around 40 out of 70 stores it launched last year were opened in the fourth quarter.

Expedia Inc. swings to profit. It posted a profit $79.5 million compared with a loss of $12.5 million a year ago. However, its expenses, largely linked with its expansion, rose 17%.

ArcelorMittal back in the black. Steelmaker ArcelorMittal SA said Friday it swung to a profit in the fourth quarter of 2016, while outlining an increase in capital expenditure for the current year.

Renault sees profit rise. French auto maker Renault SA reported a jump in 2016 profit on Friday as volume advanced and the loss booked for its stake in a long-troubled Russian company plunged.

FDI into emerging markets set to fall. Foreign direct investment into emerging markets—the lifeblood of economic growth for industrializing nations—is set to slide to postcrisis lows this year, curbed in part by U.S. President Donald Trump’s protectionist trade agenda.

Foreigners dump debt.Foreign buyers, led by China, are taking a smaller slice of the debt issued by the U.S. and other major economies, a change that may test the long-held belief that overseas money has kept interest rates low in the developed world.

Syndax Pharmaceuticals Inc., a Waltham, Mass., biopharmaceutical company, announced the appointment of Richard Shea as finance chief, effective Feb. 13. He will replace Allan Shaw, who is leaving the company to pursue other opportunities. Mr. Shea will receive an annual base salary of $325,000 and is eligible for an annual target bonus equal to 35% of his base salary, according to a regulatory filing.

Rocky Brands Inc., a Nelsonville, Ohio, footwear and apparel manufacturer, said that Mike Staude resigned from his position as interim finance chief, effective Feb. 17. Mike Brooks, Rocky’s chief executive, will assume the role of the firm’s principal finance chief until the company finds a permanent replacement.

THE WEEKEND READER

Why you should to encourage whistleblowing.Harvard Business Review draws on the recent Well Fargo fake account scandal to highlight the role managers play in emboldening employees to voice out concerns and apprehensions. It is important for managers to realize that employees may just spot a part of a larger ethical breach, writes Shivaram Rajgopal.

The next big blue collar job is already here.Wired suggests that coding may not be a glamorous job but can be equated with that of “skilled work at a Chrysler plant.” If this proposition is accepted, there may be more of a push to offer programming at the school level versus only in expensive colleges, Clive Thompson writes.

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After a 30-year investment banking career, Peter Matt joined Constellium as CFO in 2016 to help the organization increase financial flexibility, accelerate growth and deliver positive free cash flow in 2019. He discusses how he has worked with CEO Jean-Marc Germain to develop the strategy, and how he is leveraging the finance organization to operationalize the plan. Mr. Matt also shares his views on instilling capital discipline and driving change across a global organization.

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